DanaInfra’s no-guarantee subway sukuk shows caution, budget discipline

The Malay Mail Online, 11 June 2015

KUALA LUMPUR, June 11 — Malaysia’s state-owned subway financier may opt not to use a government guarantee for its latest RM40 billion sukuk program, easing the nation’s fiscal burden.

DanaInfra Nasional Bhd. has asked banks to submit bond proposals to finance completion of stage one of the underground rail link in Kuala Lumpur and to fully fund phase two, according to people familiar. The company’s first RM21 billion program to kick start the project in 2012 had sovereign backing.

Malaysia’s granting of guarantees is so large that Bank of America Merrill Lynch estimates its debt is closer to 70 per cent of gross domestic product including contingent liabilities, compared with 53.4 per cent without them. The rail network is part of Prime Minister Najib Razak’s US$444 billion (RM1.66 trillion) development plan, which includes improving infrastructure as the nation seeks to become a developed economy by 2020.

“The move by DanaInfra is positive as it will lessen the government debt burden and mitigate worries over contingent liabilities,” said Gerald Ambrose, who oversees the equivalent of US$3.6 billion as managing director of Aberdeen Asset Management Sdn. in Kuala Lumpur. “We would consider buying the sukuk if the yields are attractive.”

The company has “started the funding process for Line 2” and will make a comprehensive announcement soon, according to an e-mailed statement Wednesday from DanaInfra, which has sold Islamic bonds from the 2012 program with maturities of seven to 30 years and paying coupons of 3.62 per cent to 5.51 per cent.

RAM assessment

DanaInfra last sold bonds from its existing program in April, issuing a total of RM1.5 billion of various maturities via auction and RM2 billion in two portions through a private placement. The yield on the 4.33 per cent 10-year notes has risen nine basis to 4.42 per cent since issuance and that on the 4.79 per cent 2035 securities dropped 11 basis points to 4.68 per cent.

“RAM Ratings does not rate DanaInfra Nasional Bhd. and assigning a rating would require a comprehensive due diligence process on the standalone fundamentals as well as the relationship between DanaInfra and the government,” Promod Dass, deputy chief executive officer at the Kuala Lumpur-based ratings company, said in an e-mail Wednesday.

Without a guarantee, the company’s revenue generation potential will be more important. The first line of the subway stretching from Sungai Buloh north of Kuala Lumpur to Kajang to the south will be completed in 2016. The second phase will run from Sungai Buloh to the administrative capital of Putrajaya. The system will carry two million passengers a day, according to government estimates.

Revenue capacity

“DanaInfra’s move not to get a government guarantee will have a positive impact on the sovereign, but I would want to know more about the company’s revenue generation capacity before making a decision to buy,” said Elsie Tham, a senior fund manager at Kuala Lumpur- based Manulife Asset Management Services Bhd., which oversees more than $1 billion. “On its own, the standalone credit file looks weak as the company doesn’t have a proven track record.”

Fitch Ratings has warned that Malaysia faces a 50 per cent chance of a credit-rating downgrade during a second-quarter review amid the build up of “contingent liabilities” for the government related to state investment company 1Malaysia Development Bhd, Andrew Colquhoun, Fitch’s head of Asia Pacific sovereign ratings, said in May.

Total debt

The nation’s public debt totaled RM596.8 billion as of the end of March and government guarantees amounted to RM173 billion, said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore.

Islamic bond offerings in Malaysia, the world’s biggest sukuk market, declined 24 per cent in 2015 to RM23.5 billion from a year earlier, data compiled by Bloomberg show.

“Without a guarantee, investors will definitely ask for higher yields,” said Chua. “The country’s high contingent liabilities and nervousness over 1MDB’s debt will also weigh on investors.” — Bloomberg

(Web source: http://www.themalaymailonline.com/money/article/danainfras-no-guarantee- subway-sukuk-shows-cautious-budget-discipline)